A new research note released by the Bank of Singapore (BOS) suggests that cryptocurrencies are likely to replace gold as a store of value. However, the note says it is unlikely that such digital currencies can replace fiat currencies even as their appeal grows.
Inefficient Unit of Exchange
According to the research note, it is the volatility of cryptocurrencies that makes them â€œan inefficient unit of exchange.â€ This inefficiency, in turn, makes cryptocurrencies an unsuitable medium of exchange. Still, as one local outlet report explains, cryptocurrencies stand a better chance if they can overcome â€œkey hurdles such as trust, volatility, regulatory acceptance and reputational risks.â€ When these hurdles are overcome then such â€œdigital currencies can also be used in investor portfolios as a potential safe-haven assets and for asset diversification.â€
Meanwhile, the same media report quotes Mansoor Mohi-uddin, the chief economist at BOS, who explains that investors also â€œneed trustworthy institutions to be able to hold digital currencies securely.â€ On top of that, the economist says â€œliquidity needs to improve significantly to reduce volatility to manageable levels.â€
Although the value of bitcoin has surged by more than 300% in the past year, the digital asset experienced wide price fluctuations throughout. At one point, the crypto asset crashed by more than 30% on a day that has become known as the Black Thursday. Using this price crash as an example, Mohi-uddin concludes that the crypto asset is in fact â€œcorrelated with stocks and other risk assets rather than trading as a counter-cyclical safe-haven.â€
According to the economistâ€™s assessment, this means the crypto asset is â€œlikely to be dumped by investors during a market meltdown, as occurred at the start of the pandemic in March 2020.â€
Institutional Investors and Liquidity
Meanwhile, the BOS suggests that the increased participation in the cryptocurrency markets by bigger investors could be one way of solving the liquidity challenge. The BOS says:
Concerning the potential function of digital currencies as alternatives to fiat money, the BOS research note finds their reputational risks an impediment. Furthermore, Mohi-uddin argues that governments have shown their unwillingness to embrace a technology that â€œcould potentially displace national currencies.â€ In addition, he says governments may not tolerate technologies that curtail the â€œability of policymakers to print money during economic crises.â€
Do you agree that cryptocurrencies wonâ€™t replace fiat currencies? Tell us what you think in the comments section.